The world markets got a little scarier today. Plunges across the globe are fairly rare and cannot go unnoticed or be treated lightly - as if only a passing storm.
The question in everyone's mind is, where is my money going to be safe? Treasuries? Gold? The mattress seems to be gaining a tempting popularity. And while I don't think it is wise for consumers to stockpile large amounts of money, it may, however, be prudent to invest in inventories. Inventories of needed supplies - food, clothing or other items - that we may need in the future for schooling, work, job changes (or worse - layoffs), and emergencies. Physical, tangible, non-monetary items that even the deepest recession cannot take away or devalue.
And why not? These types of goods are cheap right now. Merchants are begging you to buy them. And the investment will go a long way when you need to draw on it in the future. And if in some miracle the economy suddenly changes course, the goods will return you the pleasure of knowing that you are consuming something in the present that cost you a lot less money in the past.
And so we begin to cycle into a physical goods inventory investment period. Other than the reasons stated above, why is this better than stashing away money?
First and foremost, it keeps some revenues flowing through the economic system. Purchasing an increased supply of Campbell's soup keeps them in business and it keeps you from going hungry should the future not look so bright. Plus, just as on any futures market, you are locking in your prices today for goods you will consume in the future, which is never a bad idea.
So what is something the government 'spendulus' package missed entirely? It is something that is never mentioned, and never allocated in the vast and deep gulf of $800 Billion dollars that is supposedly headed our way. Any wonder, then, why banks are not loaning the $350 Billion already given to them? There was no suggestion or directive given by the Federal Reserve on how that money should be loaned. A huge blunder in Uncle Ben's thinking and philosophy. Let me first start with a well known parable:
"And unto one he gave five talents, to another two, and to another one; to every man according to his several ability; and straightway took his journey.
Then he that had received the five talents went and traded with the same, and made them other five talents.
And likewise he that had received two, he also gained other two.
But he that had received one went and digged in the earth, and hid his lord's money.
After a long time the lord of those servants cometh, and reckoneth with them.
And so he that had received five talents came and brought other five talents, saying, Lord, thou deliveredst unto me five talents: behold, I have gained beside them five talents more.
His lord said unto him, Well done, thou good and faithful servant: thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord.
He also that had received two talents came and said, Lord, thou deliveredst unto me two talents: behold, I have gained two other talents beside them.
His lord said unto him, Well done, good and faithful servant; thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord.
Then he which had received the one talent came and said, Lord, I knew thee that thou art an hard man, reaping where thou hast not sown, and gathering where thou hast not strawed:
And I was afraid, and went and hid thy talent in the earth: lo, there thou hast that is thine.
His lord answered and said unto him, Thou wicked and slothful servant, thou knewest that I reap where I sowed not, and gather where I have not strawed:
Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury."
The banks simply dug a hole and stored up the money for a hopefully brighter day, and largely because the fearful Investment Bankers at those banks would rather show a 3% return than a loss and be fired. Simple enough. They did not "trade with the same" and therefore in my opinion should return the money that we as taxpayers might find our own way to "receive mine own with usury".
But what if the Fed would have done something I don't recall ever being done during my lifetime? What if the Fed would have required that the banks themselves "purchase" inventory from businesses? Not for consumption, but merely for stashing away the inventories for better times. Production levels could be somewhat maintained, and then once the inventory was sold, the company would return the loaned money to the bank and repay the loan. This would be like the bank purchasing a future in inventories from companies in many different industries. Banks working in partnership with companies in this way would ensure that money was flowing into the system where necessary - at the corporate and small business levels, and would ensure that the businesses themselves were using the loans to maintain production. By maintaining production, the business would be able to continue similar or current levels of production, while the bank would be aquiring inventory assets. Assets, which unlike other futures or investments, are not traded on day to day markets and would be aloof from catastrophic market swings.
In fact, the actual production would not necessarily have to occur. The future could be an option that gets exercised later, just as we have with some futures traded on the MERC. It could be a contract that at some point the product will need to be produced, however current staff still remain with their jobs. However I like the idea of physical inventory production because it is more immune from the failures of futures contracts and options.
By adding to stockpiles now when prices are lowered, with funding coming from partnered co-operation with banks, the US would be preparing itself for the future turnaround, and would stave off the seemingly downward circular spiral of Corporate Capital Management. That idea follows the normally prudent logic of the following:
The Firm: company orders are down, spending must freeze
The Household: firm spending is frozen. I must save.
The Economy: Production is down. Consumer Spending is down.
The Firm: company orders are continuing downward, layoffs are in order
The Household: I lost my job, I have no money to spend
The Economy: Layoffs abound, Consumer spending plummets
...
Eventually following this senario, the economy will depress, and both prices and values will continue downward even as currency deflates.
The above scenario is the main emergency issue in our economy today. Forget for a moment the bad mortgages, failed institutions, and trillions in lost equity. That to me is not the emergency of the moment. That is the damage that will require the tools of surgeons. Right now we need to stop the bleeding. And the above scenario points out two main factors to me as I see it:
Production and Consumer Spending, both of which, when viewed with the goggles of ceteris paribus, seem to be directly proportional.
So, invest in building up inventories, and production will be maintained. Maintain or increase production, maintain or increase consumer spending. And as any futures investor knows, a big sign of future confidence and possible growth is seeing a business increase their inventory. And the last added benefit is market-enabled price stabilization. Since stockpiles are increasing, prices will be moderated. Especially if most of the inventory is put in reserve where it is not available to go to market. (putting it all available to market will simply create a firesale - which is the opposite of what we want). This is similar to what oil companies do when they cap a well. They are putting those daily barrel production numbers in a reserved inventory, where it is not available for purchase until a later date. And we all know that oil companies spend hundreds of billions of dollars buying these oil reserves, so this idea is not unfounded. And since they seem to be some of the only companies making money or even coming close to breaking even, the logic would be good for banks - and the Fed for that matter - to follow.
Higgins somehow pulled this idea off with much of his own capital. During nearly the entire Great Depression, while asking the military for a contract to purchase the Higgins boats, he produced and stockpiled thousands of boats that he hoped he would sell to the military in the future. 10 years later that date finally came, and his stockpile singlehandedly won the war. For 10 years he never saw a return on most of his inventory, even while maintaining production, costs of materials, and business costs. Yet the booming profits that came from being ready to meet the military's enormous demand for higgins boats paid Higgins unfathomable sums of money and success.
Savvy capitalists have done it before.
Maybe 'spendulus III' will get it right.
Tijs Limburg
Chairman and CTO of DMX - Digital Media eXceleron, Inc.
Get eXcited!
www.dmxed.com
Blogs:
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The "Don't Tread on Me" Flag: The First Navy Jack is enjoying renewed popularity these days thanks to an order from the Secretary of the Navy that directs all U.S. Navy ships to fly the First Navy Jack for the duration of the War on Terrorism.
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